The Indian rupee could fall below 85 for the first time on Thursday, after Federal Reserve officials announced fewer rate cuts in 2025, sending the dollar index to its highest level in two years.
The one-month non-deliverable futures contract indicates that the rupee will open at 85.04-85.06 to the US dollar, up from 84.9525 in the previous session.
Overnight, U.S. stocks plunged, Treasury yields rose and the Dollar Index soared after the Fed signaled a much slower pace of rate cuts than expected.
The median projection in the Fed’s summary of economic projections called for two rate cuts in 2025, up from four in September. Mr. Powell, at his post-policy news conference, reinforced the message that the central bank will now be cautious about cutting rates amid stubbornly high inflation.
Fed officials’ median forecasts showed inflation expected to be higher than expected. The PCE core inflation forecast was raised to 2.8% for 2024 and 2.5% for 2025, from 2.6% and 2.2% previously.
“Following the results of the December meeting, which were significantly more optimistic than we had anticipated, we are changing our outlook for Federal Reserve policy,” Morgan Stanley said in a note.
Analysts at Morgan Stanley now expect the Fed to cut rates by 25 basis points twice next year, in March and June. They previously expected the Fed to cut rates at its January, March and May meetings.
The Fed’s hawkish tone likely reflects possible changes U.S. President-elect Donald Trump is likely to make, analysts said.
“What Trump does will be the biggest story next year and the biggest risk for the rupee,” said a bank foreign exchange trader.
“The Reserve Bank of India (RBI) will be very busy.
The RBI regularly intervenes in foreign exchange markets to ensure that the pace of rupee depreciation is measured.
KEY INDICATORS:
** One-month non-deliverable rupee forward exchange rate at 85.24; One month onshore forward premium at 19.5 paise.
** Dollar Index at 108.02; increase of more than 1% on Wednesday
** Brent down 0.7% to $72.9 a barrel
** The yield on ten-year US bonds is 4.51%; it rose 12 basis points on Wednesday.
** According to NSDL data, foreign investors sold $281 million worth of Indian stocks on December 17.
** According to NSDL data, foreign investors bought $14.5 million worth of Indian bonds on December 17.
